Should start-ups put customer value before survival?

The notion that early stage businesses need to focus on solving a client problem rather than on their own long-term survival is a common one. However, they need to explain their commercial goals and strategies when speaking to industry intermediaries like analysts or investors. That is my takeaway this week after one to one meetings with the founders of eleven start-ups, many of which face important choices about the partnerships they make and the resources they look for.

Key issues for start-ups

These new businesses shared some similar opportunities. In my discussions, I found myself returning to five themes.

Going to market directly when a B2B strategy would be better.

Many businesses stressed the benefits of starting small. It allows them to learn a lot, and to test the ways in which customers get value from their consolations. One delighted customer at a time sounds great if you are that customer. Of course, it also helps founders to divide their time across other priorities and to avoid diluting their equity. However, these firms would be able to create much more value with the same sales effort by selling to the largest buyers that would take them seriously. Larger sales, even if their marginal profitability is a little lower, would cover overheads and build scale. Sometimes the right question is: how does this become a business worth paying $100+ million for?

Focussing on clusters and ecosystems.

The easiest way to grow is to concentrate. I saw this personally during my time as one of Ovum’s pre-IPO shareholders. Breaking into the North American market was very hard. We could have been better off focusing on one area. We should have looked at the six or seven segments where we had the most opportunity, and then focussed on the couple where our competition was weakest: maybe that would have been a metro area focus like Ontario or Washington D.C. or a market focus like healthcare or the public sector. This can help with the greater power of recommendations from organisations that are close to each other, but even in very pragmatic ways like saying that a salesperson is nearby seeing local customers.

Sell now if the founders are not committed.

Many of the businesses have gone through a transformation, and on that challenging journey, it seems that sometimes the business needs to go in a direction that doesn’t suit the owner. Many founders look at the business’s ability to help them to meet their goals, and they often confuse their enthusiasm for the recommended direction for the business’s viability. In fact, sometimes these founders have great business ideas whose ultimate potential is simply beyond their personal horizons. In that setting, they have an opportunity to hand the business over to others, ideally through a partial sale or potentially through taking external funding to hire new management.

Scale fast if you are easily copied.

Few businesses were really developing a minimally-viable produce (MVP) rather than the simplest version possible. Many of the business ideas had a lot of promise, and three or four of them could have easily raised funding with their current pitches if they were prepared to work with and through the networks of well-placed investors. However, some of the ideas were not easily defensible because they could be easily copied. That means they need to scale fast to win enough market share to hamper the growth of competitors. In the short term, that can be surprisingly easy if they have a product or service that new channel partners can easily grasp and monetize. In the medium term, they probably need to aim for partnerships with major channel partners. Those partnerships need to be tightly constructed so that the partners ultimately purchase them and cannot intermediate them.

Look for investors that share your passion.

Business founders have widely differing approaches towards borrowing and raising external capital. Sometimes, I suspect that many people’s attitudes toward investment risk really reflects their experience of money in early life: some are expansive and others are cautious. One founder I met was thinking of making an investment in her business that was larger than the combined projected income of some of the other businesses. And the truth with almost all of these businesses was that they would have benefited from more investment earlier on. There are many places to get funding, but the best money comes from well-informed investors. A ‘modest’ investor with enthusiasm and connections in your market will often be better than a big-brand bank or larger investor that might not have the same passion. The more they understand the market, the more you will benefit from them.

Context

I met with these business founders at an important time. All the businesses are tenants of a successful and well-resourced business incubation centre. Over the last half year, they have benefitted from a structured business growth programme. Working with professional advisors and external business mentors, each business has worked through a formal business research and planning process. Formally, the process aims to support the business in developing the business plans and formal presentations needed in pitches. Alongside this process, many of the businesses and business owners go through a profound transformation and develop new goals. Since last week, when they pitched, they have been mulling over their feedback and options. I was brought in to hear their pitches, evaluate their progress and make recommendations to each business.

The businesses themselves span different sectors but they have a lot in common. They are spin-outs from a high-quality, AACSB-accredited business school known for its FT-ranked graduate degree in business. The school has a unique relationship with a management leadership organisation housed in the school. The incubation centre is next door, and the co-location of these businesses allows them to learn from each other and build up a common curriculum of expertise (in areas like application development, fundraising, business networking, digital marketing). These founders are also quite different, and some of them have a business idea that is deeply rooted in their past experiences.

What’s key for survival?

There are many reasons why business founders would want to make sure their business scales up only when the foundations are firm. The carpenter’s saying, “Measure twice to cut once”, sounds especially true to early-stage businesses that have to balance the flexibility to adapt to customers with the need for solid business plans to use with lenders, investors and other stakeholders. That approach seems to be especially successful at ensuring start-up survival: The incubation centre has worked with almost 500 businesses over more than a dozen years, more than two-thirds of which are still in business.

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